Chapter 4:

U.S. and International Research and Development: Funds and Alliances

R&D Patterns by Sector

In this part, industry and Federal Government investment in R&D is examined in greater detail. See chapter 5 for additional information pertaining to R&D performance in the academic sector.

Industrial Research and Development top

Industry is, by far, the largest R&D-performing sector. In 1997, for-profit companies spent an estimated $130.6 billion of their own (and other nonfederal) funds and $20.8 billion in federal funds on R&D performed in U.S. industrial labs. (See figure 4-6 and appendix table 4-3.) In addition, an estimated $2.3 billion in federal funds were spent on R&D performed at FFRDCs administered by industrial firms.

Mid-1990s Expansion. Between 1993 and 1997, companies' own spending grew at an average annual rate of 5.8 percent in inflation-adjusted dollars. This mid-1990s expansion in industrial R&D activity is largely attributable to international competition; sustained, record-setting profitability; and the introduction of new capabilities in information technology. In addition, in many firms, external research funding is growing at a rate faster than internal spending (Larson 1997b). (See "External Sources of Technology Gaining in Popularity.") The most recent National Science Foundation (NSF) data show a 43 percent increase in company R&D funds contracted to outside organizations between 1994 and 1995 (NSF 1997a). [Skip Text Box]

External Sources of Technology Gaining in Popularity top

There are a number of ways companies can access external sources of technology, including:

  • outright acquisition,
  • exclusive license,
  • joint venture,
  • minority equity,
  • option for future license,
  • joint development,
  • R&D contract, and
  • exploratory research funding (Chatterji 1996).

Although data on the number and value of these activities are largely unavailable, considerable anecdotal evidence indicates that outsourcing R&D is increasing. For example, aircraft manufacturers are outsourcing more of their R&D to their suppliers, subcontractors, and even customers;* they are also actively involved in joint ventures with their European counterparts (Council on Competitiveness 1996).

A number of factors make external sources of technology increasingly attractive. On the demand side are the following:

  • Increased global competition has meant shorter product life cycles and faster development cycle time. To keep up with the accelerating pace of innovation, companies are increasingly having to look beyond their doors to gain access to new sources of technology.

  • Downsized companies that handed out pink slips to many of their R&D professionals to reduce costs now find themselves without all the technical expertise they need.

  • Collaboration enables participating companies to reduce their risks in exploring promising but highly speculative new technologies.

  • Recent success stories have generated more interest in collaboration.

On the supply side, the following factors apply:

  • The worldwide growth of scientific and engineering knowledge has created new, valuable-and available-information sources.

  • The availability of venture capital has spurred the formation of startup companies in several high-tech areas, including biotechnology, electronics, and software, that are attractive sources of new technology.

  • There is a growing workforce of technical professionals displaced by downsizing; their former employers and other organizations are eager to take advantage of their expertise and experience.

*Boeing outsourced a significant amount of R&D connected with the development of its 777 airliner, including relying on foreign firms (the Japan Aircraft Development Corporation and other firms from Asia, Europe, and Canada) for design and manufacturing expertise (Council on Competitiveness 1996).

The recent upswing presents a sharp contrast to the preceding two-year period when R&D financing was relatively flat. In addition, the 1993-97 increase exceeds the 4.2 percent average annual gain recorded between 1985 and 1991.

Federal Government Share at All-Time Low. There was a time (30 years ago) when the Federal Government contributed more than half the total amount of funds spent by industry on R&D activities. Although those days are long gone, government funding did account for one-fourth to one-third of all industry R&D spending as recently as the late 1980s. (See figure 4-5.) The most recent data, however, show that proportion, at 14 percent, to be the lowest it has ever been—12 percentage points below what it was in 1989. Between 1987 and 1997, federal funding of industry-performed R&D fell at an average annual constant-dollar rate of 6.1 percent. However, the descent seems to be slowing: the estimated average yearly rate of decline for 1994-97 is less than it was earlier in the decade. (See appendix table 4-4.)

R&D in Manufacturing Versus Nonmanufacturing Industries top

Probably the most striking change in industrial R&D performance during the past decade is the service sector's increased prominence. Until the late 1980s, little attention was paid to R&D conducted by nonmanufacturing companies, largely because service sector R&D activity was negligible compared to the R&D operations of companies classified in manufacturing industries.

Increase in Service Sector R&D. Prior to 1983, nonmanufacturing industries accounted for less than 5 percent of the industry R&D total. A decade later, the R&D landscape looked very different because of a ninefold increase in service sector R&D. The proportion of total industrial R&D performed by companies classified in service industries reached 26 percent in 1993 and then decreased a couple of percentage points in 1994 and 1995. (See chapter 6, figure 6-15.)

In 1995, nonmanufacturing firms' R&D outlays totaled $32 billion—$27.4 billion in funds provided by companies and other nonfederal sources, and $4.6 billion in federal funds. (See appendix table 4-19.) Data for 1991-95 show the R&D expenditures of companies classified in the service sector increasing at about the same pace as in manufacturing companies (which accounts for the 2-point decline mentioned in the preceding paragraph).

Four industry groupings account for 90 percent of the nonfederal R&D performed in the service sector:

It is likely that companies formerly classified in manufacturing industries account for a sizable portion of the R&D dollars in these service sector categories (especially the top three). For example, given the growing importance of computer software (relative to hardware) and other information technologies, a classification shift from manufacturing to nonmanufacturing would not be unusual.

In addition, because the United States invests a relatively large share of its resources in health care—13.6 percent of GDP in 1995 (U.S. HHS 1996)—the increasing importance of R&D laboratories in the nation's industrial R&D portfolio is also predictable. This greater prominence can be attributed, in large part, to major advances in research on the human body, the establishment and growth of a variety of medical research facilities, and the maturing and success of the biotechnology industry. For example, between 1975 and 1996, nearly 1,000 biotechnology companies came into existence.[9]  (See figure 4-9.) Many of these companies are classified in the research, development, and testing services category.

The nonmanufacturing categories also contain a significant number of small startup firms. Some of these are spinoffs from academic research—which is how many software and biotechnology companies came into being (Council on Competitiveness 1996).

Manufacturing Sector. As service sector R&D became more visible, manufacturing R&D lost some of its prominence. Nevertheless, the manufacturing sector continues to dominate industrial R&D. (See text table 4-3.)

In 1995, the six largest manufacturing industries—in terms of companies' own (and other nonfederal) R&D expenditures in the United States were:

These six industries accounted for 91 percent of all nonfederal R&D funds spent by companies classified in manufacturing industries in 1995, the same percentage they have held since at least 1985. What has changed is their share of all industrial R&D dollars. That proportion fell from over four-fifths of the total in 1987 to two-thirds in 1991, where it has remained. (See appendix table 4-21 and text table 4-3.)

Among the six industries, companies classified in the electrical equipment industry exhibited both the largest absolute increase ($8.2 billion) and the highest percentage increase (92 percent) in nonfederal R&D expenditures between 1991 and 1995. Text table 4-3 shows a flip-flopping in proportionate share of the total for the electrical equipment and machinery industries between 1991 and 1995, with the latter losing 29 percent of its nonfederal R&D monies. (All of the cutback was in the computer segment of the industry.)

It is probably safe to assume that some part of the machinery industry's decline is attributable to a reclassification of companies into other manufacturing (e.g., electrical equipment) and nonmanufacturing (software) industries, although this scenario cannot be confirmed.[10]  Likewise, the electrical equipment industry's increase may reflect some movement of companies into that industry rather than real gains in R&D investment. However, further study of NSF survey data indicates that a sizable portion of the growth is real (NSF 1998c).

All of the additional electrical equipment industry monies appear in the electronic components segment, which accounted for 56 percent of that industry's 1995 R&D dollars and whose R&D spending increased threefold between 1991 and 1995.[11]  Until 1993, the communications equipment—segment was the largest component of the electrical equipment industry in terms of R&D. But in 1995, that segment's R&D expenditures were less than half those of electronic components companies; undoubtedly, some of the communications equipment decline reflects a reclassification of those firms into the nonmanufacturing communication services category. (See appendix table 4-21.)

In the largest R&D-performing industry—transportation equipment—a 7.9 percent average annual increase (in inflation-adjusted dollars) in R&D outlays by companies classified in the motor vehicles subgroup was somewhat offset by a 2.7 percent average annual decline in the aircraft and missiles segment between 1991 and 1995.[12]  The 1991-95 increase in automakers' R&D financing represents a major acceleration in R&D investment by that industry, compared to the preceding six-year period. (See appendix table 4-21.)

It is no secret that U.S. companies' share of the world market for motor vehicles declined during the last quarter century; however, the industry has rebounded in recent years. The success and strength of foreign competitors actually led to a "revolution" of sorts in U.S. laboratories and production facilities. R&D has played a major role in the changes, in terms of both the automobile production process and the product itself.[13]  The overriding goal of the changes has been to reduce production costs and time-to-market. Success is evident: where it once took five or more years for a new car to go from drawing board to showroom, it now takes only two to three years (Council on Competitiveness 1996).

Two of the largest R&D-performing industries—petroleum refining and extraction, and chemicals (excluding drugs and medicines)—did not contribute to the overall growth in nonfederal industrial R&D expenditures between 1991 and 1995.[14]  Companies in these two industry classifications reported cutbacks of 29 percent and 5 percent, respectively, in their R&D financing during the period. (See appendix table 4-21.) R&D downsizing is reflected in oil and chemical companies' drop in ranking in Inside R&D's annual list of the top 100 R&D performers in the United States. (See appendix table 4-23.) It is possible that at least some of the decline in in-house R&D reported by companies in these two industries is being offset by their increasing participation in industrial R&D consortia. (See "Industrial R&D Consortia.") Chemicals and petroleum companies are some of the most active members of research joint ventures (RJVs), especially those devoted to environmental R&D (Link 1996b).

In contrast to the lackluster R&D performance of industrial chemicals companies, the other part of the chemicals industry, which consists of pharmaceutical companies, had its usual healthy increase in R&D spending: the size of drug companies' R&D programs nearly tripled between 1985 and 1995.[15]  (See appendix table 4-21.)

The most prominent recent trend in the drugs and medicines industry has been the melding of pharmaceutical and biotechnology research; more than one-third of drug companies' R&D projects are primarily biotechnology-related. In addition, pharmaceutical companies have been collaborating with and acquiring biotechnology companies to take advantage of the latter's potentially lucrative discoveries. The success and strength of the biotechnology industry is reinforcing the United States's world leadership position in drug research (Council on Competitiveness 1996).

R&D Expenditures by Size of Company top

In 1995, 122 companies with more than 25,000 employees spent more than $1 million each on R&D in the United States (NSF 1998c). Prior to 1990, this group of companies accounted for more than half the nonfederal R&D expenditure total. That share has fallen below 50 percent because the R&D outlays of small and medium-size firms have been increasing faster than those of large companies. For example, small firms (those with fewer than 500 employees) accounted for 14 percent of all nonfederal R&D expenditures in the United States in 1995, up from 10 percent five years earlier. (See appendix table 4-21.)

Industrial R&D Concentrated in Large Firms. Despite small companies' rising share, U.S. industrial R&D expenditures remain heavily concentrated in a relatively small number of relatively large firms. For example, approximately 25 U.S. companies spent more than $1 billion each on R&D in 1996; 10 years earlier, only 10 companies exceeded the billion-dollar mark (Technical Insights 1997 and 1988). In 1995, the 4 largest R&D-performing companies (in terms of non-federal funds) accounted for 16 percent of the total amount spent; the 20 largest, 34 percent; and the 200 largest, 68 percent. The last statistic, however, is less than the 80 percent and 82 percent shares held in 1990 and 1985, respectively. (See appendix table 4-24.)

Changes in Rankings of Top 100 R&D Companies. During the 10-year period 1986-96, major membership changes occurred in Inside R&D's annual list of 100 leading R&D-performing companies. (See appendix table 4-23.) The three largest R&D-performing companies, however, were the same in both years, although the second- and third-ranked companies switched places. That constant may be one of few revealed by comparing the lists from 1986 and 1996, as major changes in rankings occurred among the remaining 97 entries:

R&D Intensity top

In addition to absolute levels of and changes in R&D expenditures, another key indicator of the health of industrial science and technology is R&D intensity. R&D is similar to sales, marketing, and general management expenses in that it is a discretionary—i.e., non-direct-revenue-producing-item that can be trimmed when profits are falling. There seems to be considerable evidence, however, that R&D enjoys a high degree of immunity from belt-tightening endeavors—even when the economy is faltering-because of its crucial role in laying the foundation for future growth and prosperity.

There are a number of ways to measure R&D intensity, but the one used most frequently is the ratio of R&D funds to net sales. This statistic provides a way to gauge the relative importance of R&D across industries and firms in the same industry.

The ratio of R&D dollars to net sales tends to be fairly stable over time, although year-to-year changes of 0.1 to 0.2 percentage points are not uncommon. Also, there are substantial differences between industries. (See appendix table 4-25 and text table 4-4.)

In 1994 and 1995, the most recent years for which data are available, nonfederal R&D spending as a percentage of net sales for all R&D-performing companies classified in manufacturing industries was 2.9 percent. This ratio was four-tenths of a percent less than that recorded for the peak year 1992 and was the first dip below 3.0 percent in 10 years. (See figure 4-11 and appendix table 4-25.) Despite the decline, it is still safe to assume that little change has occurred in the level of importance accorded R&D relative to other discretionary expenditures. That is, roughly the same proportion of companies' income was devoted to R&D throughout the late 1980s and early 1990s.[17]  Minor fluctuations indicate that R&D is able to hold its own during recessionary periods such as that experienced in the early 1990s and in periods of recovery when profits are outpacing R&D investment.

Disparity in R&D Intensity Across Sectors. As previously mentioned, R&D intensity differs significantly across industries. (See text table 4-4.) Individual industry ratios range from a high of 10.4 percent in the pharmaceutical industry to a low of 0.5 percent in the food and primary metals categories.[18]  The pharmaceutical industry has led all other industries since 1993, a reflection of the risky and complex nature of drug research; in 1995, it had the only double-digit ratio. Among the least R&D-intensive industries, only the petroleum industry ranked among the six largest R&D-performing industries.

Federal R&D Funds top

In 1997, industrial firms spent an estimated $20.8 billion in federal funds on R&D activities. As mentioned earlier in this chapter, federal R&D support to industry has been declining almost continuously since 1987.

The aircraft and missiles industry is the leading recipient of federal R&D funds. Interestingly, this industry formerly accounted for more than two-thirds of all federal monies spent by companies; however, the most recent company-reported data (1995) show it accounting for less than one-half of federal funds. (See appendix table 4-22 and "U.S. Aerospace Firms' Declining Government Sales Offset by Growing Civilian Market.") [Skip Text Box]

U.S. Aerospace Firms' Declining Government Sales Offset
by Growing Civilian Market top

Data from the Aerospace Industries Association (AIA) show sales of aerospace products and services falling from $116 billion in 1991 to $90 billion in 1995, then increasing to $120 billion in 1998 (AIA 1997). The recent increase is attributable to growing sales to commercial customers, although DOD remains the industry's largest single customer. But while DOD used to account for two-thirds of aerospace sales (between 1984 and 1987), it now accounts for slightly more than a third. AIA data show DOD purchases from the aerospace industry declining from $61.8 billion in 1987 to an estimated $42.6 billion in 1998.* In 1998, for the first time, all federal agencies together accounted for less than half of all aerospace sales; from 1984 through 1987, they accounted for approximately three-fourths.

Product group data also show the shift from military to civilian customers:

  • Sales of military aircraft fell from $43.7 billion in 1987 to an estimated $30.4 billion in 1998. They now account for 25 percent of all aerospace-related sales, down from nearly half in 1987.

  • AIA data show civilian airliner sales surpassing those of military aircraft for the first time in 1997. In 1998, civilian planes and jets are estimated to be 41 percent of all aerospace-related sales, up from only 17 percent in 1987.

  • Annual sales of missiles fell 43 percent in the 1990s—from a peak of $14.2 billion in 1990 to $8.0 billion estimated for 1998. As a percentage of all aerospace-related sales, missiles fell from 13 percent in 1990 to 7 percent in 1998.

  • Space sales (now just over a quarter of all aerospace-related sales) increased steadily between 1982 and 1992, fell slightly between 1992 and 1994, then increased again to $32.8 billion estimated for 1998.

*DOD data are a combination of two accounts: (1) procurement and (2) research, development, test, and evaluation.

A spate of mergers and restructurings has taken place in recent years among defense contractors. Like the "big three" automakers, there are now the "big three" aerospace companies. (See figure 4-10.) For more information on industry's defense-related R&D, see "Independent Research and Development Provides Additional Defense Funding." [Skip Text Box]

Independent Research and Development Provides
Additional Defense Spending top

In addition to the federal R&D obligations discussed in this chapter, DOD's Independent Research and Development (IR&D) Program enables industry to obtain federal funding for R&D conducted in anticipation of government defense and space needs. Because it is initiated by private contractors themselves, IR&D is distinct from R&D performed under contract to government agencies for specific purposes. IR&D allows contractors to recover a portion of their in-house R&D costs through overhead payments on federal contracts on the same basis as general and administrative expenses.

Until 1992, all reimbursable IR&D projects were to have "potential military relevance." Because of the concern that defense cutbacks would reduce civilian R&D—not only in the level of commercial spillovers from weapons research but, more importantly, in reduced DOD procurement from which IR&D is funded—the rules for reimbursement were eased and the eligibility criteria broadened.*Reimbursement is now permissible for a variety of IR&D projects of interest to DOD, including those intended to enhance industrial competitiveness, develop or promote dual-use technologies, or provide technologies for addressing environmental concerns.

In 1996, industrial firms were estimated to have incurred minimally $3.0 billion in IR&D cost, of which $2.9 billion was deemed eligible for reimbursement. The government reimbursed $1.9 billion, or 66 percent of the IR&D total. As a result of the expanded reimbursement eligibility criteria, the amounts reimbursed have held rather steady at about $2 billion per year since 1984. (See appendix table 4-56.) As an equivalent proportion of combined DOD and National Aeronautics and Space Administration (NASA) industrial R&D support, IR&D fell from 11 percent in 1984 to 7 percent in 1996, although this figure is undoubtedly on the low side as a result of accounting and statistical changes. Previously, contractors with auditable costs of $40 million or more were included in the IR&D statistics. The current threshold now includes only those firms with auditable costs of more than $70 million. NASA also reimburses IR&D costs and closely follows DOD procedures. The statistics provided here include reimbursements from NASA. It remains unclear whether changes in the rules governing IR&D have had their intended effect on industrial activity.

*See NSB (1991) for a brief description of how reimbursement for IR&D was until recently determined. The National Defense Authorization Act for Fiscal Years 1992 and 1993 (P.L. 102-190) provided for the gradual removal of limitations on the amount DOD will reimburse contractors for IR&D expenditures and partially eliminates the need for advance agreements and technical review of IR&D programs.

Patterns of Federal R&D Support top

R&D consumes only a fraction—less than 5 percent-of all public expenditures in the United States. (See "R&D Faring Relatively Well Despite Fiscal Austerity.") Despite their lack of prominence within a trillion-dollar budget, R&D funding trends reflect overall national priorities, including the emphasis on deficit reduction and the shifting balance between defense and domestic programs. For example, a reduction in defense-related programs, facilitated by the end of the Cold War, has been partially offset by increases in support for civilian R&D programs—especially those aimed at improving disease diagnosis and treatment, technological competitiveness, and the environment. [Skip Text Box]

R&D Faring Relatively Well Despite Fiscal Austerity top

The President's FY 1998 budget calls for approximately $1.7 trillion in total government spending. Only 4.3 percent of that amount—about $72.6 billion—is designated for R&D programs (including R&D plant).

Reducing the deficit has been an overriding goal of both Congress and the Administration. To gain a better understanding of the difficulty involved in accomplishing this objective, it is helpful to split total federal spending into two categories—"mandatory" and "discretionary." Certain program expenditures, including those for Social Security, veterans' benefits, Medicare, Medicaid, and interest on the national debt, are considered mandatory items in the federal budget. That is, the government is already committed by law to financing those programs at certain levels and cannot cut them without serious political repercussions. In contrast, discretionary items, including R&D programs, do not enjoy the same level of protection from budget-cutting proposals; and the Federal Government does not have to, or is not already committed by law to, finance such programs at particular levels.

In recent years, the proportion of the federal budget that supports mandatory programs has been expanding while the discretionary share has been shrinking. Mandatory programs are expected to account for more than two-thirds of the total federal budget in 1998—up from less than half prior to 1980. With discretionary programs now comprising less than a third of the total budget, items like R&D and other discretionary programs are becoming increasingly likely candidates for reduction or curtailment to meet deficit-reduction targets.

Despite its increasing vulnerability, R&D has actually fared relatively well during the fiscal austerity of the 1990s. (See figure 4-12.) For example, an examination of R&D as a percentage of the total federal budget reveals the following:

  • Although all federally funded R&D is expected to fall from 5.2 percent of the budget in 1990 to 4.3 percent in 1998, nondefense R&D as a percentage of the total budget is expected to remain fairly constant at 2.0 percent during the same period.

  • As a proportion of total discretionary spending, R&D has risen from 11.5 percent in 1980 to 13.0 percent in 1990 to 13.3 percent in 1998.

  • Nondefense R&D as a percentage of nondefense discretionary spending has been holding fairly steady since 1980 at just under 13 percent.

Total federal R&D obligations were an estimated $68.1 billion in fiscal year (FY) 1997, 12 percent below the peak 1989 level (in inflation-adjusted dollars).[19]  Defense downsizing, which affected programs at both DOD and DOE, fueled the overall decline. (See appendix table 4-27.) [Skip Text Box]

The Federal Science and Technology Budget top

In a 1995 report (NAS 1995) members of a National Academy of Sciences committee proposed an alternative method of measuring the Federal Government's S&T investment. According to committee members and other policymakers, this new approach-titled the Federal Science and Technology (FS&T) budget-provides a better way to track and evaluate trends in public investment in R&D.

The FS&T budget is actually a subset of what is usually referred to as the federal budget for research and development. Advocates of the new approach contend that the traditional method of counting federal dollars spent on R&D overstates the actual amount of federal R&D investment, because certain items are included that should not be. Although no one discounts the importance of production engineering, testing and evaluation, and upgrade of aircraft and large weapons systems, FS&T budget proponents contend that these activities should not be counted as R&D because they do not involve the discovery of new knowledge or the creation of new technologies. Moreover, they are not "major contributor[s] to economic growth, national security, health, [and] quality of life."

If the FS&T were used instead of the traditional budget to evaluate federal R&D investment, DOD's R&D numbers would look quite different. The $25 billion in FY 1997 DOD obligations slated for "major systems development" would no longer be considered R&D and therefore would be subtracted from DOD's total R&D obligations of $33 billion. Doing so would leave $8.0 billion in the FS&T budget, or $3.9 billion in DOD-sponsored research and $4.1 billion in advanced technology development.* In addition, FS&T budget data would show a 9.1 percent decline in DOD R&D obligations between FYs 1994 and 1997-about twice the percentage decline registered when performing a conventional analysis of DOD's R&D investment. (See text table 4-5.)

For all other federal agencies except DOD, the National Academy of Sciences estimates a 3.5 percent increase in the FS&T budget between FYs 1994 and 1996, compared to a 7.4 percent increase using the traditional method.

*DOD's S&T base provides a substantial portion of all federal support for research and generic technology development in several key areas, including computer science, electrical engineering, and materials.

Reduced DOD Prominence in Federal R&D Portfolio top

For the first time since 1981, DOD is expected to account for less than half of total federal R&D obligations. (See figure 4-13.) The DOD share of federal R&D spending has been declining steadily since the mid-1980s.

DOD obligations have fallen in both current and constant dollars every year since 1992. In 1997, they stood at an estimated $33 billion, down nearly 20 percent in real terms from the 1992 level. (See appendix table 4-27.)

Despite the receding prominence of DOD in the R&D portfolio, the agency still overshadows all other federal sources of R&D dollars. The Department of Health and Human Services (HHS) is a distant second, with R&D obligations estimated at $12.2 billion in FY 1997. In contrast to the DOD trend, HHS support has been increasing steadily since 1992, although no real growth is expected between 1996 and 1997. (See figure 4-14.)

Between 1992 and 1997, HHS's R&D obligations rose an estimated average of 3.7 percent per year in real terms, and increased to 18 percent—up from 14 percent—of all federal R&D obligations during the same period. This growth reflects the steady stream of new dollars into almost all of the National Institutes of Health (NIH), which account for 95 percent of HHS R&D obligations.

The Major Federal R&D Agencies top

In addition to DOD and HHS, five other agencies have R&D budgets that exceed $1 billion. In descending order, they are: the National Aeronautics & Space Administration (NASA), with $9.2 billion in FY 1997 obligations; DOE, $5.9 billion; NSF, $2.3 billion; the Department of Agriculture (USDA), $1.4 billion; and the Department of Commerce (DOC), $1.1 billion. These five agencies-plus DOD and HHS-account for 95 percent of U.S. Government R&D support. (See appendix table 4-27 and figure 4-13.)

NASA and NSF have seen slow expansion of their R&D budgets in the mid-1990s, with average annual constant-dollar increases estimated at 1.3 percent and 1.6 percent, respectively, between 1992 and 1997. (The NASA five-year change, however, includes a 7 percent real reduction estimated for 1996-97.)

In contrast, both DOE and USDA experienced cutbacks. DOE R&D obligations fell about 3.3 percent per year in real terms between 1992 and 1997, and USDA's dropped about 1.8 percent during the same period.

DOC joined the ranks of major R&D funding agencies a few years ago because of its Advanced Technology Program (ATP). DOC's R&D obligations topped $600 million in FY 1992, $800 million in FY 1994, and $1 billion in FY 1995, where they have remained. All of the 1990s gains are largely attributable to ATP. Although ATP continues to represent a major piece of DOC's R&D activities, its future remains uncertain.[20]  (See discussion of ATP under "Federal Partnerships With Industry.") DOC's annual level of R&D obligations is expected to have dropped 9 percent in real terms between 1996 and 1997.

Mid-Size R&D Funding Agencies top

Three other agencies—the Department of Transportation (DOT), the Environmental Protection Agency (EPA), and the Department of the Interior (DOI)—each have annual R&D obligations of $500 million to $1 billion. Of these mid-size R&D funding agencies, DOT is expected to have shown the largest increase in R&D obligations between FYs 1992 and 1997 (7 percent per year in real terms), while a modest gain and a decrease are expected for EPA and DOI, respectively. The increase in DOT's R&D obligations reflects that agency's current emphasis on R&D related to advancements in the areas of fuel efficiency and emissions, including the Partnership for a New Generation of Vehicles, or Clean Car Agreement. (See "Technology Transfer Activities.")

Federal R&D Support by Character of Work top

Federal obligations for basic research, applied research, and development were an estimated $14.7 billion, $14.4 billion, and $38.9 billion, respectively, in FY 1997. Overall, only modest real growth has taken place in both basic and applied research support during the mid-1990s. Each category registered average annual constant-dollar gains of 1 percent between 1992 and 1997. In contrast, the trend in federal support of development—by far the largest slice of the R&D pie-looks quite different, with development obligations in FY 1997 estimated to be more than $2 billion below the FY 1992 level. (See appendix table 4-27.)

Basic Research. After 10 consecutive years (1981-91) of annual real increases in support for basic research, the pace of federal spending on this research type slowed in the 1990s. Although total funding of basic research is continuing to grow in this decade, there have been at least two years in which annual obligations failed to keep pace with inflation.

Five agencies obligate more than $1 billion annually for basic research. HHS, with an estimated $6.6 billion in FY 1997 obligations, accounts for approximately 45 percent of the total. This is more than three times the level obligated by NSF, the second largest supporter of basic research, with $2.1 billion in estimated obligations for FY 1997. The other three agencies are DOE ($2.0 billion), NASA ($1.9 billion), and DOD ($1.1 billion). (See "DOD's Basic Research Programs.") Together, these five agencies accounted for an estimated 93 percent of all federal basic research obligations in FY 1997. [Skip Text Box]

DOD's Basic Research Programs top

DOD's basic research effort has three main elements, listed below. The DOD organizations responsible for these three elements and their funding levels and projections are given in appendix table 4-28.

  • Defense research sciences programs of the armed services, Defense Advanced Research Projects Agency, and the Office of the Secretary are the largest components of DOD's basic research portfolio, accounting for approximately 70 percent of the agency's total basic research funding. They also represent the largest source of DOD research funding for universities—most of which is conducted by single-investigator researchers—and support research undertaken by industry, government laboratories, nonprofit organizations, state and local governments, and FFRDCs.

  • In-house Laboratory Independent Research is a program that finances basic research in support of laboratory missions and provides a research environment conducive to the recruitment and retention of outstanding scientists and engineers.

  • The University Research Initiative is a collection of academic multidisciplinary research programs.

In 1995, DOD began funding six strategic, multi-disciplinary research objectives. They are identified in DOD's Basic Research Plan as biomimetics (with $10.0 million in FY 1997 funding), nanoscience ($23.9 million), smart structures ($8.7 million), broad band communications ($17.2 million), intelligent systems ($18.5 million), and compact power sources ($9.5 million). Funding levels for each of these initiatives remained fairly constant (in current dollars) between FYs 1995 and 1997.

During the 1992-97 interval, HHS, with $1.5 billion, enjoyed the largest absolute increase in basic research funding, more than four times that of NSF, which had the second highest absolute increase ($348 million).

Of the five leading sources of basic research dollars, only DOD's obligations failed to keep pace with inflation between 1987 and 1997. The other four agencies registered average annual growth rates ranging from 1.1 percent for NSF to 3.4 percent for DOE during the same period. For DOE and NASA, the growth took place in the first part of the 10-year period: sizable increases between 1987 and 1992 were counterbalanced by little or no growth between 1992 and 1997.

Applied Research. The annual levels in constant 1992 dollars of total federal applied research obligations in the late 1980s and early to mid-1990s produce a wavy trend. (See appendix table 4-27.) Increases in some years were matched by cutbacks in subsequent years. Overall, the annual changes average out to a real increase of 1.7 percent per year between 1987 and 1997, similar to that for basic research. The applied research numbers illustrate that cutbacks in defense-related R&D activities are being counterbalanced by increased government investment in civilian R&D programs, e.g., health and space.

Federal funds for applied research are somewhat less concentrated than basic research dollars. Four agencies (NSF drops out of the group) obligate more than $1 billion annually for applied research and account for approximately three-fourths of all applied research obligations.

HHS is the leading supporter of applied research, with an estimated $4.2 billion in obligations in FY 1997. A large portion of these monies supports research related to the treatment of various diseases, including cancer and AIDS. DOD is second with $2.7 billion; followed by NASA, $2.4 billion; and DOE, $1.5 billion. Among these four agencies, NASA had the largest percentage increase-40 percent in inflation-adjusted dollars-in applied research obligations between 1992 and 1997. HHS registered the second highest percentage increase, with 29 percent, and the largest absolute increase at $1.3 billion.

Although both DOD and DOE recorded healthy increases in applied research obligations in the late 1980s and early 1990s, a turnaround occurred in the mid-1990s. In FY 1997, DOD obligations are estimated to be 30 percent lower in real terms than in FY 1993; DOE's obligations are expected to be down 20 percent between 1995 and 1997. (See appendix table 4-27.)

Development. There has been no real growth in federal obligations for development since FY 1992. (See appendix table 4-27.) Cutbacks averaged an estimated 3.5 percent per year between FYs 1992 and 1997.

DOD is the source of approximately three-fourths of all federal monies spent on development. In FY 1997, DOD obligations for development were an estimated $29.1 billion. These funds have been falling in both current and constant dollars almost continuously, with only two exceptions since FY 1989, the year they peaked at nearly $34 billion.

The other agencies that obligate more than $1 billion annually for development are NASA ($5.0 billion in FY 1997), DOE ($2.3 billion), and HHS ($1.4 billion). NASA development obligations more than tripled between FYs 1987 and 1996; the growth rate averaged 11.4 percent per year in real terms during the nine-year period. However, a 9 percent constant-dollar decrease is estimated for FY 1997. There has been no real growth in DOE obligations since 1990; the average annual rate of decline in constant dollars was 6.5 percent through FY 1997. In real terms, little change has occurred in the annual level of HHS development obligations since 1994, although this agency experienced a major expansion in development funding during the late 1980s and early 1990s.

R&D Agency-Performer Patterns top

Most federal R&D funds are actually spent in other sectors of the economy. R&D funding relationships between supporting agencies and performing sectors are well-established and tend to be fairly stable over time. (See appendix tables 4-29 and 4-30 and text table 4-6.) Examples of these funding relationships follow:

Other NIST Programs top

In addition to ATP, the NIST portfolio includes laboratory research and services, the Manufacturing Extension Partnership (MEP), and the Baldrige National Quality Program. These programs were funded at $265 million, $95 million, and $3 million, respectively, in FY 1997.

Laboratory Research and Services. Seven NIST laboratories and the Technology Services organization provide technical leadership for measurement and standards. The laboratories are Electronics and Electrical Engineering, Manufacturing Engineering, Chemical Science and Technology, Physics, Materials Science and Engineering, Building and Fire Research, and Information Technology. To provide NIST with the research environment required for 21st century science, a new Advanced Chemical Sciences Laboratory is under construction, and an Advanced Measurement Laboratory is planned.

Manufacturing Extension Partnership. MEP is a nationwide system of manufacturing extension centers.These centers provide all small and medium-size manufacturers in the United States access to industrial extension services. They also act as gateways into a network of technical resources, services, and expertise related to modern best business practices and manufacturing methodologies. Congress directed NIST to begin helping smaller manufacturers compete in domestic and international markets through passage of the Omnibus Trade and Competitiveness Act of 1988, which also established ATP. In contrast to the solely mission-related R&D agendas of other S&T-related programs, both MEP and ATP were designed exclusively to boost U.S. competitiveness. Since 1989, MEP has made awards for extension center operations covering all 50 states and Puerto Rico.

Baldrige National Quality Program. The Malcolm Baldrige National Quality Improvement Act of 1987 established an annual National Quality Award to promote awareness of quality excellence, to recognize quality achievements of U.S. companies, and to publicize successful quality strategies. The Secretary of Commerce and NIST were given responsibility to develop and administer the award with cooperation and financial support from the private sector. Awards may be given each year in each of three categories: manufacturing companies or subunits, service companies or subunits, and small businesses. There were 32 award winners between 1988 and 1997.

About half of all federal basic research dollars are spent at universities and colleges. This sector receives most of its basic research support from HHS (53 percent in FY 1997) and NSF (23 percent). Federal obligations for basic research conducted by private firms are concentrated in the research budgets of NASA (48 percent), HHS (21 percent), and DOD (12 percent). Federal in-house work on basic research programs is distributed among several agencies, with the largest portions conducted by HHS (43 percent), NASA (18 percent), and USDA (15 percent). (See appendix table 4-29.)

Federally Funded R&D Laboratories top

Federal R&D obligations for all government laboratories are expected to equal $21.6 billion in FY 1997, 32 percent of total federal R&D obligations. (See text table 4-7.)

In 1995, the U.S. General Accounting Office (GAO) conducted a census of all federal laboratories that perform R&D and are operated by federal agencies or their contractors (U.S. GAO 1996a).[21]  A total of 515 laboratories were counted.[22]  (See appendix table 4-32.) In addition, 65 of these laboratories had a total of 221 satellite facilities, bringing the actual federal laboratory count to 736. For purposes of this discussion, GAO's identification of 515 laboratories will be used. Seventeen federal departments and independent agencies have laboratories; five (the Department of Housing and Urban Development, Department of Labor, Agency for International Development, Social Security Administration, and U.S. International Trade Commission) have none. At the time of the study, each state had a least one federal laboratory; California had the most with 46. Five laboratories (three run by USDA and two by the Navy) are located in foreign countries.

Of the 515 laboratories, 361 had operating budgets under $10 million in FY 1995, 101 were in the $10 to $100 million range, and 53 had operating budgets exceeding $100 million.

With 185, USDA had the largest number of laboratories in 1995. However, its operations are relatively small in size-with a median operating budget of $2.1 million in FY 1995. According to the GAO survey, DOD, DOE, HHS, and NASA laboratories accounted for 88 percent of all federal R&D laboratory funding in FY 1995. Although most federal laboratories are operated by federal agencies and employ federal personnel, 62 of the 515 were administered by businesses, universities, or other nonprofit organizations through a contract or cooperative agreement with a federal agency.

Federally Funded Research and Development Centers. Thirty-eight of the 736 federal R&D facilities identified by GAO are FFRDCs.[23]  They include research laboratories, R&D laboratories, study and analysis centers, and systems engineering/systems integration centers.

R&D obligations for these 38 facilities are expected to total $5.2 billion in FY 1997, about 22 percent below the 1992 level. (See appendix table 4-33.) The decline is a reflection of the overall downward trend in defense-related R&D associated with the end of the Cold War. For example, the United States no longer manufactures nuclear warheads, the former mainstay of some of the laboratories. The 1992-97 reduction also reflects removal of FFRDC designation from three facilities administered by industrial firms (formerly there were nine industry-administered FFRDCs; now there are six). Additionally, university- and nonprofit-administered FFRDCs experienced funding cutbacks of 16 percent and 14 percent, respectively, between 1992 and 1997.

Of the FY 1997 FFRDC total of $5.2 billion, $3.2 billion is obligated for 18 university-administered laboratories, $1.3 billion for the 6 run by industrial firms, and $644 million for the 14 facilities operated by nonprofit organizations.

The most well-known FFRDCs are often referred to as "national laboratories." These 10 facilities are funded by DOE. Three were established during World War II specifically to design and build nuclear weapons; six others were created in the decades immediately following the war to develop commercial applications of nuclear technology.[24] 

Three of the 10 national laboratories have R&D expenditures that exceed $0.5 billion. They include Sandia, with FY 1995 obligations of about $650 million; Los Alamos, $540 million; and Lawrence Livermore, $500 million. The latter two are administered by the University of California; Sandia is administered by a subsidiary of Lockheed Martin. All three facilities recorded major cutbacks in their R&D programs in the mid-1990s. (See appendix table 4-35.)

Despite an increase in collaborative endeavors with the outside world (see "Technology Transfer Activities"), most of the work conducted at FFRDCs is still defense-related R&D funded by DOE. This agency provided an estimated $3.2 billion in FY 1997, which was a little more than 60 percent of all federal R&D dollars spent at FFRDCs. (See appendix table 4-33.) Between FYs 1992 and 1997, DOE funding fell about 20 percent. DOE is the sponsoring agency for 17 FFRDCs, 11 of which are administered by universities, 4 by industrial firms, and 2 by nonprofit organizations.

NASA now ranks second in terms of R&D funds spent at FFRDCs (it captured second place from DOD in 1995); its FY 1997 R&D obligations are expected to total $800 million. This amount is down about 23 percent from the FY 1995 level of just over $1 billion, but about the same as the levels reported in 1992 and 1994. Most of these funds are spent at the agency's only FFRDC, the Jet Propulsion Laboratory administered by the California Institute of Technology. This laboratory, which serves as NASA's principal center for solar system exploration, is now the largest single FFRDC in terms of R&D financial resources.

FFRDC R&D obligations by DOD are expected to be about $720 million in FY 1997. Total DOD support to FFRDCs has been falling every year since 1992, and now stands at less than half of the 1992 level. As mentioned, one of the reasons for the decline is the removal of FFRDC designation from three industry-administered centers; however, funding also fell about 70 percent ($465 million) at university-administered FFRDCs and 32 percent ($171 million) at nonprofit organizations between 1992 and 1997. DOD is the sponsor of 11 FFRDCs: 2 administered by universities and 9 by nonprofit organizations.

The other agencies that sponsor FFRDCS are NSF, HHS, the Nuclear Regulatory Commission, DOT, and the Treasury Department. Among this group, only NSF sponsors more than one FFRDC; four of its five centers are administered by universities, the fifth by a nonprofit organization. HHS is the fourth largest agency in terms of FFRDC support, with most of its FY 1995 obligations supporting research performed at the National Cancer Institute's Frederick Cancer Research and Development Center, which is administered by four different companies.

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[9] In addition to 1,165 "pure" biotechnology companies (the vast majority of which came into being between 1975 and 1996), the Institute for Biotechnology Information counts 234 (including 56 instrument, 48 pharmaceutical, 32 chemical, 28 agricultural, 22 diagnostic, 20 food, 13 waste and environmental, and 15 in other categories) companies that also conduct biotechnology research.

[10] The R&D cutback by computer hardware firms also reflects the industry wide trend of pulling back on central laboratory research to concentrate R&D resources on the development of new products for the marketplace (Council on Competitiveness 1996).

[11] According to the Council on Competitiveness (1996), "semiconductors, opto-electronics, and flat panel displays (FPD) are the three critical building blocks of electronics systems expected to drive U.S. competitiveness in electronics markets over the next several decades." Although the United States regained the lead in the global semiconductor market in 1992, Japan is still out-distancing the United States in FPD technology, opto-electronics, and photo-lithography.

[12] U.S. firms are no longer the sole players in the world's commercial aircraft market. In addition to the entry of Airbus Industrie Groupe (a consortium sponsored by the German, French, British, and Spanish governments), other nations (including Japan, China, Russia, and Taiwan) have announced their intentions to enter the commercial aircraft market (Council on Competitiveness 1996).

[13] For example, all U.S. firms have adopted Japanese manufacturing practices such as concurrent engineering. In addition, various computer and information technologies have improved and accelerated the design, development, and production of motor vehicles. Computer-based technologies have also played a major role on the product side, i.e., electronic systems have revolutionized the way vehicles are operated. In large part, these new capabilities reflect manufacturers' compliance with government regulations. Meeting standards for mileage, emissions, and safety has played a major role in shaping manufacturers' research agendas (Council on Competitiveness 1996).

[14] According to chemicals industry officials, long-term R&D-i.e., the development of new processes and products-has been sacrificed in favor of seeking incremental improvements for existing products. Until the 1980s, one-third to one-half of R&D expenditures in the industry went to new processes and products; that proportion is now down to less than one-fourth (Council on Competitiveness 1996).

[15] The rapid growth of R&D dollars in the drug industry reflects the high cost of research directed at discovering cures and treatments for diseases like AIDS, other viruses, and drug-resistant bacteria. In addition, managed competition is changing the way drug companies do business in the health care services marketplace; new constraints on pricing could adversely affect R&D (Council on Competitiveness 1996).

[16] Lucent Technologies (ranked sixth in 1996) was split off from ATT in 1996. As a result, Lucent got ATT's top-10 berth on the list, and ATT (ranked 4th in 1986) ranked 36th in 1996. Another company, TRW, restated its R&D expenses reported to the Securities and Exchange Commission in 1996 to include all "sponsor-supported" R&D, which means that federal R&D funds are now included in the company's total. As a result, the company earned the seventh highest spot on the 1996 top-100 list.

[17] It is important to note that there were significant increases in the overall R&D funds/net sales ratio between 1981 and 1982 (from 2.2 percent to 2.6 percent) and between 1984 and 1986 (from 2.7 percent to 3.2 percent). Prior to 1982, company R&D funds as a percentage of net sales had been in the 2.0 percent range for 20 years.

[18] R&D outlays in the semiconductor equipment and materials industry are estimated to be about 12 to 15 percent of sales (Council on Competitiveness 1996). The broad industry classification system used in NSF's industrial R&D survey tends to mask pockets of high-tech activity.

[19] An alternative method for measuring federal R&D investment, called the Federal Science and Technology budget, was proposed in 1995 by the National Academy of Sciences. (See "The Federal Science and Technology Budget.")

[20] Federal R&D financing has traditionally received strong bipartisan support, but a few fissures in that unanimity-differences in emphasis and priorities-surfaced in the mid-1990s. For example, the major political parties are not in agreement on the role of government in supporting programs like ATP that provide grants to profit-making companies for technology development. Budget debate over ATP has become an annual occurrence.

[21] Excluded from GAO's survey were facilities whose purpose is to test or analyze samples for chemical, physical, or biological properties, as these activities are not considered R&D.

[22] The various NIH institutes located at the main NIH campus in Bethesda, Maryland, were counted as a single laboratory.

[23] FFRDCs include government-owned and contractor-operated laboratories, and laboratories owned by nongovernment organizations that do virtually all their work for the government.

[24] The 10 laboratories are Lawrence Berkeley, Los Alamos, and Oak Ridge, which were established during World War II to design and build nuclear weapons; Argonne, Brookhaven, Sandia, Idaho Engineering, Lawrence Livermore, and Pacific Northwest, which were created between 1946 and 1965 to advance civilian uses of nuclear technology; and the National Renewable Energy Laboratory, which was established to conduct R&D on alternative energy sources and was given FFRDC status in 1991(U.S. GAO 1994).

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